The Middle East was taken by surprise when it was reported last week that Oman is considering an income tax on “high earners”.
An income tax on individuals would be a first in the Gulf and could come into effect in 2022.
The aim is to bring down Oman’s fiscal deficit to 1.7% of GDP by 2024. It currently stands around 15.8%.
According to the International Monetary Fund (IMF), Oman’s economy is expected to contract by 10% this year, which would be the sharpest decline in the Gulf.
But as the pandemic continues to take its toll on many economies across the Middle East, it would not be a surprise to see more countries follow suit.
International Adviser spoke to several players in the UAE financial advice sector to discuss what such a tax change could mean for the Emirates.
Stuart Ritchie, director of wealth advice at AES International, said: “This is obviously a big move for the region, and is likely to impact surrounding areas who may look to follow suit.
“We, of course, saw the introduction of VAT a few years back, forever ending the ‘tax-free’ allure which appealed to so many, and so it’s perhaps not surprising that income tax was next.”
Sean Kelleher, chief executive of Mondial Dubai, said: “Whilst the Oman tax news was something of an eye-opener in terms of timing, the real direction of travel for Gulf economies is the obvious structural change caused by the decline in energy as a source of income towards what non-Gulf governments do to manage the need to pay for its obligations towards its people.”
Christopher Davies, chartered financial planner at The Fry Group, added: “It’s unlikely that income tax will be introduced in the UAE in the short term. Senior members of The Ministry of Finance have, as recently as the end of 2019, mentioned that there are no plans to increase VAT or impose new direct taxes.
“Whilst covid-19 has taken a toll on economies around the world, should income tax be introduced in the UAE, it may fundamentally change people’s opinion on the region as an expat hub and tax-advantaged environment – hurting rather than helping the finances of the country.”
The likelihood of an income tax system for ‘high earners’ in the UAE is up for debate.
The country’s main attraction for expats is its appealing approach to tax.
But options are dwindling for expats looking to work or set up shop in low or no tax jurisdictions, which may well work to the benefit of the UAE, should it pursue a personal taxation strategy.
The political unrest in Hong Kong makes it a lot less appealing than it once was; while Singapore is making it increasingly difficult for expats, as it continues to implement an inward-facing recruitment policy.
Brett Evans, managing director of Atlas Wealth Management, said: “Should a personal income tax ever be introduced in the UAE, I don’t think this will occur in the short term and could see a company tax be introduced beforehand, then it wont be the end of the world as many popular expat destination like Singapore and Hong Kong levy a personal income tax.
“However, the UAE government just needs to be careful that, should any new taxes be introduced, there is a balance of increasing government revenue whilst ensuring that the disposable income of expats isn’t diminished too greatly.
“Should the disposable income of an expat in the UAE decrease too greatly then you would see expats depart the UAE, as it already has a very high cost of living and many would not be able to sustain the deficit.”
Keheller added: “For the Gulf, the ‘new normal’ will make expatriates grumpy, but it is not unpredicted. Although income tax to expats wouldn’t be popular it could allow governments to rethink the local sponsorship model.
“In fact, I recall the World Bank advising the UAE decades ago to move towards tax as a source of revenue. The future is coming.”
Impact on the advice market
But tax changes do not just impact individuals and families. They have a knock-on effect for the advice sector.
Firms must deal with changes as quickly as expats and find incentives or tax advantages for their clients.
Andrew Bates, head of private banking in the Middle East at Nedbank Private Wealth, said: “If anything, the introduction of income tax would actually support the growth of the financial advice sector.
“We are already working with clients, and their specialist advisers, to support broad wealth planning needs, and another layer of complexity should prompt people to step back and realise that professional advice would result in immediate benefits, as well as better long-term outcomes for their wealth.
“Many clients who come to us have underestimated the impact of taxation on their wealth and the opportunity to be able to highlight the role of financial advice in tandem with a roll-out of income tax would be welcomed.”
AES’ Ritchie added: “In terms of how this move could affect the financial advice sector, it’s likely to encourage more reflection on unnecessary spending, with perhaps more of a shift towards planning for retirement, which can only be a good thing.”
The Fry Group’s Davies is less convinced. “The most obvious connection would be the impact on disposable income and the ability to save whilst resident in the UAE.
“Many expats see the UAE as a short-term home where they have the ability to save significant funds from the low tax regime. If this changes, the ability to save, and therefore invest, is likely to be reduced. This may deter future moves to the UAE, providing fewer clients for advisory firms in the region.”
UAE’s next move
Changes to taxation policy in the UAE will not be taken lightly, but is there any sense of what could be on the cards?
Atlas’ Evans said: “I think the next new tax to be introduced into the UAE will be company tax. At the moment, UAE companies pay a large amount to renew their company licenses which is agnostic to the company’s turnover.
“If we were to see a company tax introduced that is revenue dependent then this may lead to a benefit for the small to medium enterprises as their operating costs may decrease.”
Nedbank’s Bates said: “The UAE authorities are clearly thinking strategically about the future sustainability of the country’s appeal and Dubai’s as a financial hub. The recent introduction of a five-year renewable retirement visa, and the capital criteria, with regard to savings and property values attached, underscores that.
“And while the government ruled out new taxes at the end of 2018, no one anticipated the pandemic and the impact it has had on the economy and people living here.
“As such, it’s a case of continuing the conversations we regularly have with officials and ensuring we carry on providing advice to clients based on the significant international experience we bring, so that if or when things change, our clients can make the right informed choices based on their individual circumstances.”